Guided Wealth Portfolios: The LPL Approach to Digital Advice

LPL Financial, the largest organization of independent financial advisors in the United States, unveiled their digital advice platform for LPL Advisors at the recently concluded 2016 LPL Focus Conference. The platform, currently in pilot testing with about a dozen firms, is scheduled for general rollout early in 2017. Although the pilot test and advisor feedback may lead to some tweaks between now and the full launch, it is unlikely that any major revisions will occur between now and the initial full release.

My first impressions of Guided Wealth Portfolios are generally favorable. Guided Wealth Portfolios runs off a custom version of FutureAdvisor, which is owned by Blackrock. Prospects enter an email address and create a password to start. They are then asked to create a savings goal and answer five risk questions. They are also invited to aggregate held away assets. The aggregation is powered by Yodlee.

As per LPL’s interpretation of FINRA guidelines, the risk questions are situational in nature (e. g. If your portfolio were to sell off 31% in three months, what would you do?). Based upon the answers to those questions, the investor would be mapped to one of LPL’s five standard investment objectives. Each of those objectives maps to an asset allocation.

The asset allocations and individual investment options are selected by LPL Research. Currently, LPL is constructing portfolios from nine low cost, broad market ETF’s. The ETF’s include iShares, SPDR and Vanguard products. There is a minimum investment of $5,000. At that level, investors will generally receive a portfolio made up of a subset of the nine ETF’s in order to minimize trading fees. Investors with $20,000 or more will generally receive a portfolio consisting of all nine ETF’s, with weightings appropriate for their goals and risk tolerance.

Advisors will pay 35 basis points for the platform. This includes the complete technology platform: the fully digital onboarding, the risk profiling, portfolio construction and portfolio monitoring/maintenance, a custom branded website, an advisor dashboard that shows all clients and prospects, trading, rebalancing, tax loss harvesting, and automated annual check-ins to ensure that the clients investment objectives have not changed.

It addition to the platform charge, the end client pays the underlying ETF investment management fees and the advisor’s fee. According to LPL, the average underlying ETF costs are approximately 15 bp. Advisors in the pilot are charging between 35 bp and 69 bp. This means that the end investor is paying between 85 bp and 119 bp in total. LPL will cap the advisor portion of the fee at 100 bp, so the maximum cost to an investor on the Guided Wealth Portfolio platform would be approximately 150 bp annually.

Clearly, this is a more expensive product than many of the direct to consumer platforms, so the question will be: “What value added services are the advisors providing to justify that higher fee?” If they are in fact delivering value, it seems to me that this platform is a good deal for consumers, however if the consumer is essentially the LPL portfolios without any value added services from the advisor, the case for the higher fee is difficult to make.

It is also worth noting that there are similar digital platforms available to advisors that cost less than 35 bp, however, for LPL advisors, the cost of Guided Wealth Portfolios can be justified. There are a number of features that Guided Wealth Portfolios offers that add value for LPL advisors. These include:

Compliance approved marketing materials

The ability to seamlessly transfer clients to another LPL investment program if their needs change

Automated annual client check-in that is captured and saved for compliance purposes

The ability to accept ACATT transfers to fund the account (Most direct to consumer platforms only accept cash).

In addition, LPL is paying for a marketing firm to work with pilot participants. Among their goals is to identify the best positioning, target markets and business model for Guided Wealth Portfolios. The findings of the marketing firm can then be shared with all LPL advisors when the platform goes into full production.

Initial interest among LPL advisors in Guided Wealth Portfolios appears to be very strong. The Guided Wealth breakout sessions at LPL Focus were oversubscribed, and traffic at the Guided Wealth booth was very strong.

Overall, it seems that LPL has created a very credible product in a relatively short period of time, and it is likely that the product will evolve over time based upon input from their advisors. It remains to be seen whether advisors using the Guided Wealth Platform can price it and position it effectively, but this certainly appears to be a big win for LPL.

Related

Joel P. Bruckenstein, CFP®, is Publisher of the T3 Tech Hub (formerly the T3 newsletter) and the producer of the Technology Tools for Today (T3) Advisor Conference, the only annual technology conference for independent advisors, as well as the Technology Tools for Today (T3) Enterprise Conference.
Bruckenstein is an internationally acclaimed expert on applied technology as it relates to the financial service industry. He is the co-author of three books: Virtual Office Tools for a High Margin Practice, Tools and Techniques of Practice Management, and Technology Tools for Today’s High Margin Practice.
Joel’s monthly technology columns appear in Financial Advisor magazine and Financial Planning magazine. In addition, he compiles the annual technology survey for Financial Planning magazine.
Bruckenstein has for more than twenty years advised financial service firms of all sizes on improving their technologies, processes and workflows. For more information about Joel Bruckenstein and the services his firm offers, please visit www.JoelBruckenstein.com